It’s that time of the year when everyone is scurrying to ensure that their investments made for the year are submitted to escape the dreaded income tax cuts.
However, often people fail to plan and invest properly and end up seeing tax being deducted at source and that source, unfortunately, happens to be their salary. If you’ve learnt that you might be losing money this year because you haven’t invested enough, fret not.
The first step is to understand how much you need to invest to reduce your income tax liability for the year. The next is to invest as soon as you can, submit your investment declarations and complete the circle by filing for your income tax returns later mid-year.
The idea should be ‘Income minus Savings = Spending’ so that long term goals are not jeopardized. In any investment that you make, you should earmark the savings towards your long term goals.
With this investment you could potentially be looking at an extra earning in the year, recovering what you lost to the income tax deduction. However, invest right and you could not only be looking at earning back your money in the near-term but also savings and financial benefits in the long term.
There are several tax-saving options that one can choose from and depending on their total income during the year either reduce their tax liability or even bring it down to zero.
Under the section 80C of the Income Tax Act, 1961 Rs 1.5 lakh can be deducted or from your taxable income by investing in the right tax saving instrument. For instance, by investing in life insurance, or a united linked insurance plan (ULIP), you can claim this deduction under section 80C when you file your income tax return and get a refund of the excess taxes paid.
By investing in medical insurance you can claim an additional deduction of Rs 25,000 from your taxable income towards premium paid for medical insurance for self, partner or dependent children. The deductible amount can go up to 30,000 if you also have this is as a premium paid towards the medical insurance for a senior citizen (above 60 years).
While investing in insurance can certainly bring down your immediate taxable income, savings or payouts resulting from these investments can be exempted from being taxed, further improving your earning opportunities
In case of life insurance, insurance policy payouts in the event of maturity or death are exempt from being taxed when claimed under section 10(10D) of the Income Tax Act, 1961 as long as the premium paid in a financial year has not been more than 10% of the sum assured.
With ULIPs, under the current tax laws, while the premium paid qualifies for deduction under Section 80C, the growth during the policy period is also tax exempt ( not subject to tax) and even the maturity amount (when claimed under Section 10 10(D)) are tax-free. Moreover, any switching of funds amongst the various fund options or partial withdrawals made before maturity, are also tax-free. With ULIP you can also enjoy LTCG i.e. Long Term Capital Gains benefit.
The amount of funds switched thereby resulting in gains, if any, and the partial withdrawals or the maturity proceeds received during the year, may or may not be shown in that year’s return as it is already a tax-exempt income.
Insurance in its various forms can be an excellent tool to help you bring down your taxable income or exempt your investments from taxation. Choosing the right tax saver is extremely important and the decision should largely hinge on those tax savers which not help you save tax but also help you create tax-efficient corpus over the long term.